Italian bond yields spike•Two-year bond yields soar above 8% as investors put premium on near-term risks

(Source)The Guardian - UK : Desmond Supple and Jens Sondergaard on the EMEA team at Nomura have just issued their Europe Special Report: Endgame : The eurozone financial crisis has entered a far more dangerous phase as asymmetry of risk in the market has combined with banking sector deleveraging. This is a particularly toxic combination for financial asset values and ultimately the real economy. Unless a sizable balance sheet can be brought to bear on the crisis – which we believe can now only be the ECB – a euro break-up now appears probable rather than possible. The need for an ECB policy response is immediate in our view. However, we expect the ECB to deliver only conventional easing measures next month (25bp rate cut, longer-term LTROs and dovish forward guidance to monetary policy). This would not comprise a solution to the crisis, but should enable the ECB to avert a full-force financial crisis in December. However, we would be more comfortable in making this assumption if the ECB also eased collateral rules. The risk is that the ECB is required to deliver this policy response before 8 December. However, as we enter 2012 we believe the ECB will have to go down the QE route as the economic outlook deteriorates and financial market stress intensifies. This could preserve the integrity of the euro, although the risks are sizable and over the coming weeks and months the outlook for financial markets appears bleak and downside economic risks are likely to build.

Traders sold Italian, German, French and Spanish equities as world leaders left Cannes without delivering concrete resolutions for the eurozone - just hours before Greek prime minister George Papandreou won a crucial a vote of confidence in parliament. The PM won by 153 votes to 145, clearing the way for a new coalition government and the next tranche of EU bail-out money to be paid. The leaders said they had agreed that the International Monetary Fund (IMF) would "monitor" Italy's economy. But even this, the only significant advancement on last week's Brussels accord, failed to reassure the markets on Italy's €1.9 trillion (£1.6 trillion) public debt pile. The yield on Italy's 10-year bonds soared to 6.4pc - the highest level since the euro was launched. Analysts have warned that Europe's third-biggest economy will need a bail-out if its borrowing costs are not brought down. In Milan the stockmarket fell 2.66pc, leading the German DAX down 2.72pc and the French CAC down 2.25pc. In London, the FTSE 100 held out, closing down 0.33pc. Silvio Berlusconi insisted that both the economy and government were "solid". He said he had even turned down an offer of funding from the IMF. However, Christine Lagarde, boss of the international fund, denied that any offer of funding had been extended. The final G20 communique was derided as "flimsy" and "uninspiring". In the document, leaders said they backed Europe's "determination to bring its full resources and entire institutional capacity to bear in restoring confidence and financial stability". They reaffirmed the Brussels agreement of October 26 to bail-out Greece, recapitalise European banks and "build firewalls" around indebted countries to stem contagion. The leaders called for the "swift implementation" of the resolutions.

The G20 is planning to increase the crisis-fighting firepower of the International Monetary Fund after the start of its summit was dominated by the first open admission from EU leaders that it might be necessary for Greece to leave the eurozone if the single currency is to survive. George Osborne said there was a "real sense of urgency" on a day that saw an emergency interest rate cut from the European Central Bank, backtracking from Greece over a referendum on its bailout conditions, and a recognition that the IMF may need extra resources to cope with a deteriorating global economy. Amid distinct echoes of the financial market meltdown in the autumn of 2008, European leaders put massive pressure on the embattled government of Greek prime minister George Papandreou, forcing the abandonment of plans to hold a referendum and triggering a political showdown in Athens. Downing Street sources said "strong political pressure to sort itself out" had been put on Greece, while Barack Obama said it was time to "flesh out" Europe's bailout plan. Share prices rose towards the end of the day as it became clear that Papandreou had been forced to shelve his referendum plans and was seeking to put together a government of national unity that would agree to Europe's bailout conditions. How could Greece leave the eurozone? There are two scenarios for Greece to leave the euro. The first would be if Greece was unable, or refused, to abide by its EU-IMF austerity programme. The refusal would lead to EU-IMF payments being withheld and Greece defaulting, a catastrophic event for both the Greeks and the EU. The second scenario involves a Greek referendum on the EU-IMF austerity programme, the economic pain and the loss of sovereignty entailed with it. As the EU has made clear, via Angela Merkal and Nicolas Sarkozy, a No vote or even the referendum itself would be taken as a decision to exit the euro. Can Greece leave the euro? Does it mean leaving the EU? The EU lawyers are not sure. "It's a legal minefield in uncharted waters," said one EU legal advisor. The confusion might be a deliberate ploy. A European Central Bank document examining the possibility two years ago decided that "some lack of legal certainty is desirable" to stop countries walking away too easily. "The hitherto silence may therefore be preferable to clarity," it said. George Papandreou, the Greek prime minister, seems to think it is all or nothing. "If we leave the euro we will have to leave Europe," he told MPs.

German bailout vote is 'too little, too late' for the eurozone - Chancellor Angela Merkel won her "own majority" for the bill, narrowly averting the collapse of her government, but only after pledging that there was no grand plan committing Germany to vast and unlimited liabilities. Horst Seehofer, leader of Bavaria's Social Christians CSU, said his party would go "this far, and no further", insisting any expansion of the rescue machinery was out of the question. "The financial markets are beginning to ask whether Germans can afford all this help. We must not risk the creditworthiness of the German state," he said. Norbert Lammert, the Bundestag's president, said lawmakers felt they had been "bounced" into backing far-reaching demands and warned that Germany's legislature would not give up its fiscal sovereignty to any EU body. Finance minister Wolfgang Schäuble said reports of a secret plot to boost the guarantees of the fund (EFSF) were scurrilous. "It will not be raised. There can be no debate about this. These suspicions are indecent," he said, acknowledging only that the money will deployed as "efficiently as possible". Officials in Berlin say Mr Schäuble has been careful not to rule out use of leverage. The finance ministry has no specific plan to lever the fund but is aware of six or seven options "floating about" – pushed by France and Brussels – that might offer a solution.

German finance minister Wolfgang Schauble said it would be a folly to boost the EU's bail-out machinery (EFSF) beyond its €440bn lending limit by deploying leverage to up to €2 trillion, perhaps by raising funds from the European Central Bank. "I don't understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense," he said. Mr Schauble told Washington to mind its own businesss after President Barack Obama rebuked EU leaders for failing to recapitalise banks and allowing the debt crisis to escalate to the point where it is "scaring the world". "It's always much easier to give advice to others than to decide for yourself. I am well prepared to give advice to the US government," he said. The comments risk irritating the White House. US Treasury Secretary Tim Geithner has been a key driver of plans to give the EFSF enough firepower to shore up Italy and Spain, fearing a drift into "cascading default, bank runs and catastrophic risk" without dramatic action. Markets across the world ignored the mixed signals about the true scope of EU rescue measures, convinced that EU leaders have a "grand plan" up their sleeves and will unveil the details after the Bundestag has voted on Thursday on the earlier July deal to revamp the fund. France's CAC-40 surged by 5.7pc, led by a 17pc rise for Societe Generale. Germany's Dax was up 5.3pc. The FTSE 100 jumped 4pc in London, the biggest one-day rise this year. Oil jumped almost $4 in New York to $88 a barrel. In Berlin, Chancellor Angela Merkel was fighting for her political life as the rump of lawmakers from her coalition vowed to reject the EFSF package, though the latest tally suggests she may squeeze by with her own majority. Angry dissidents suspect that secret plans are being withheld until after the vote.

Recap of the day - sept. 23. 2011

Just a recap of the day

1. The G20 settled markets with a comminiques overnight on Thursday, pledging to "take all actions to preserve the stability of banking systems and financial markets as required".

2. In London the FTSE 100 opened up 1.2pc with banks rising strongly, but the bounce was shortlived. By 10.45am the index had tumbled through the psychologically important 5,000 level after reports that Greece saw orderly default as possible. The mood was darkened after an EU spokesman said there were not plan to further recapitalise eurozone bank - other than what has been done. This seems to contradict the thrust of the G20 statement.

3. By lunchtime the market was turning around after rumours of further ECB measures to support the eurozone economy. Sentiment was further boosted by comments from Osborne at the IMF annual meeting in Washington. He said Europe had until the G20 meeting in Cannes in November to solve the political crisis in the eurozone. This six-week deadline seemed to give investors hope that leaders understood the urgency of the eurozone's situation.

4. London's leading shares close up 0.5p on the day, but down 5.6pc on the week. Markets in Germany, France, Italy and Spain also rose, closign up 0.6pc, 1pc, 2.1pc and 1.36pc respectively. However, after European markets closed the Dow Jones and the S&P 500 seemed to be trading sideways as nerves returned.

The cat is out of the bag. Eurozone leaders, in various states of denial about the need for their banks to raise more capital, now have to face some hard facts, courtesy of the International Monetary Fund. The sovereign debt risk to European banks has risen since the start of 2010 by about €200bn, with a total spillover effect of €300bn, estimates the Fund. These are staggering figures. They are not, it should be said (and as the IMF emphasises), the size of the black hole in the collective balance sheets of European banks, since there's a very significant difference between a risk and an estimated loss. All the same, €200bn, or €300bn, has to be prepared for. The IMF's analysis explains why the funding climate for many European banks has become icy. When huge losses are guaranteed, but their precise size and location is unknown, the rational response is to play safe by reining in lines of credit. And when everybody wants to retreat, the flow of money slows, thereby exaggerating the crisis by choking lending to economies. There really is only one remedy – get capital into the banks, raise the buffers and generate confidence that losses, however large they turn out to be, can be absorbed. Now that the IMF itself is recommending recapitalisation of the European banking system, there is a greater chance it might happen. That's the good news. The bad news is that there is no guarantee that the eurozone leaders will act in time to prevent an avoidable crisis turning into a catastrophe. Many flew into a funk when the IMF's new managing director, Christine Lagarde, emphasised the need for recapitalisations a few weeks ago. Some screeching U-turns are required.

"The Eurozone will survive" says Fitch..."The issue was never in doubt" . Never in the history of propaganda have so many words been wasted to so little effect.

Why not just abandon the mistake and revert to national currencies. If managed properly it should not be disastrous, but just a money changing exercise, which puts right the daft notion of a common currency in the current situation. They changed to the euro quite simply so change back quite simply and let the drachma etc. float. Debts will still remain but national economies will adjust. The E.U. dinosaur will not like it, but when you make a mistake instead of trying to fudge a solution it is better in the long run to face reality.
The next step is to revert the E.U. to the common market and the ECU and forget federalization and the human rights act, both of which hinder progress and national ambitions. I believe the above would receive the whole-hearted support of the European nations.

The International Monetary Fund has warned in its latest Global Economic Outlook that Europe and the US could slip back into recession next year unless they quickly tackle economic problems that could infect the rest of the world.The apparent 'boom' in living standards, property prices, pensions, benefits and consumer goods wasn't real, it was created on the back of massive personal and government borrowing. I would have thought that much at least was obvious to anyone.
The problem is not really lack of short-term growth, it's the expectation that we should have constantly have growth and that we should be 'better off'' in every way year after year. We can't return to the false boom and so we will have a period of contraction and shrinking of living standards back to just what they should have been without the debt-filled illusion of quick growth. Those shrunken living standards in the developed economy still look pretty good compared to the average African, non-oil Arab or South American state.And so living standards will have to fall, state expenditure will have to be reduced, debt payed down and we will all have to return to the real world
It isn't complicated, after all what is general 'poverty' in the Western world? Leaving aside the very real cases of the homeless and destitute. No new personal computer, no new mobile and no Sky subscription. No free gastric band operations, waiting a bit longer for a new hip or knee. No new car or telly or foreign holidays. Working longer because you're living longer and staying healthier and not expecting 50% of your best salary when you retire. Sometimes you don't need a complicated solution because the problem is simple. We were conned by politicians that all this was affordable and sustainable.. and it wasn't.

Poland is urging Greece to seek help from the Paris Club - the informal group of creditors which has organised agreements worth $553 billion since it was founded in 1956. Poland's economy minister (also previous prime minister of Poland, and Brigadier General in the country's volunteer fire service), Waldemar Pawlak, said today: Where the Greek debt is concerned, it is necessary to call on the broad institutional experience of groups like the Paris Club which has carried out restructuring in several dozen countries. Good solutions are required and they've proven themselves. There should be no political declarations about Greece going into a controlled default because this leads only to destabilising. Instead, public and private institutions should lead restructuring in order to stabilise the Greek situation in a civilised manner.

The incompetent and ill prepared EU Commissioner = EU economy commissioner Olli Rehn

EU economy commissioner Olli Rehn (the incompetent commissioner ) said a team which represents the troika of the Commission, the European Central Bank and the IMF – would “provide technical support to the Greek authorities”. The previous team was pulled out of Athens earlier this month because of a lack of progress by the Greek government in reducing its deficit. Mr Rehn on Sunday praised Greece’s new cuts, saying they would “go a long way to meeting the fiscal targets” for 2010 and 2011. “Greece needs to meet the agreed fiscal targets and implement the agreed structural reforms to fulfil the conditionality and ensure funding from its partners,” he said.Philipp Roesler, Germany’s economy minister, said an “orderly default” for Greece could no longer be ruled out and branded the country’s deficit-reduction measures “insufficient”. The warning is likely to spook financial markets further and comes despite Greece yesterday announcing a fresh €2bn (£1.7bn) of budget cuts and the introduction of a country-wide real estate tax. Evangelos Venizelos, the finance minister, said the cuts and tax measure were necessary to allow Greece to meet obligations demanded by the European Union and IMF in exchange for bail-out funds. Writing in the Die Welt newspaper, Mr Roesler said: “To stabilise the euro, we must not take anything off the table in the short run. That includes as a worst-case scenario an orderly default for Greece if the necessary instruments for it are available.” He said such a default would mean “re-establishing the affected state’s ability to function, perhaps with a temporary restriction of its sovereign rights”. ..."perhaps with a temporary restriction of its sovereign rights" Temporary? I don't think so, this is the real agenda of the Eurocrats for all EU members.

MARSEILLE, France—The German government has nominated Jörg Asmussen to succeed Jürgen Stark on the executive board of the European Central Bank, Finance Minister Wolfgang Schaeuble said Saturday. At a news conference after weekend meetings of the finance ministers and central-bank governors of the Group of Seven leading industrialized nations, Mr. Schaeuble said he hoped that Mr. Asmussen would be able to assume Mr. Stark's duties toward the end of the year. Jörg Asmussen, Germany's deputy finance minister, has been nominated to the executive board of the ECB. Mr. Asmussen is currently deputy finance minister. His position there is something of an anomaly, as he is a member of the Social Democratic Party in a center-right government of Christian Democrats and Free Democrats. He originally had been appointed by the previous finance minister, Peer Steinbrück, who served under Chancellor Angela Merkel in a "Grand Coalition" until autumn 2009. Finance Minister Schaeuble had kept him on because of his first-hand experience of the first wave of the financial crisis. Mr. Schaeuble said he had notified Jean-Claude Juncker, head of the euro group of finance ministers, of the government's proposal earlier Saturday. The proposal must be endorsed first by the euro group and the euro-zone's heads of state, and the European Parliament and the ECB itself must also be consulted. With Mr. Asmussen having accumulated profound experience of the euro zone's debt crisis over the past three years, and with the substantial political will of Germany behind the proposal, it is unlikely that the nomination will fail.

MARSEILLE, France (Reuters) - IMF chief Christine Lagarde said on Saturday that reports of a draft IMF document showing a 200 billion euro (172 billion pound) shortfall in European banks' capital were misleading and the lender was still finalising its study. "There has been misreporting about the 200 billion euros, this number is tentative," Lagarde told a news conference after G7 and G8 finance talks in the southern French city of Marseille. "This is not a stress test that the IMF conducts nor is it the global capital need for European banking institutions, that it is not, and we are currently in discussions with our European partners to assess the global methodology until we reach a tentative draft. It will be published before the end of September."

Leading European experts have said that, although the German Court is unlikely to throw out the bail-out policy, which would cause chaos across the eurozone, it is likely to set conditions on continuing German support for the policy. Matt Persson, of the think tank Open Europe, said: "The Court will almost certainly approve the bail-outs, possibly citing as a reason that monetary stability is a legally protected interest. However, the Court is also susceptible to public opinion and, in order to guard its reputation, could well demand more influence for the German parliament and lay down additional constitutional red lines in return for approving the bail-outs." It could also make moves towards fiscal union in the eurozone even more complicated, he said. Chancellor Angela Merkel has faced criticism for not seeking fresh democratic mandates for the millions of euros the German government has provided in support for the eurozone's struggling nations such as Greece and Ireland. "Injecting more parliamentary democracy into the eurozone crisis is clearly a good thing but it will also further limit European Union leaders' room for manoeuvre to deal with the crisis, which in turn could increase market uncertainty," Mr Persson said. "Unfortunately for the ECB, under such a scenario it would once again be forced to pick up the responsibility of lender of last resort, as the European Financial Stability Facility will be too inflexible and unresponsive to play that role." Judges in the Constitutional Court will decide on Wednesday whether Merkel was right to sign off on multi-billion euro bail-outs for floundering economies. Five German professors launched the lawsuit which, even if it fails, has galvanised lawmakers in Berlin to demand more say in decision making.

The International Monetary Fund approved a further €1.4bn (£1.2bn) payout to Ireland on Friday as part of a wider European bailout. Ireland's government announced a four-year €15bn austerity programme last year, which included deep cuts to public spending and benefits, and large tax hikes. The programme paved the way for a €85bn bailout package from the IMF and the EU. The four-year plan was intended to help the debt-stricken country take control of its financial crisis and the IMF said on Friday that its government had "maintained resolute implementation" of the programme. It also said Ireland's efforts to reorganise and reduce debt in its domestic banks was "ahead of schedule in some areas". While Ireland has so far received €8.7bn of the total bailout package it has also been restricted from accessing the bond markets – which in effect means it cannot borrow money on its own. One of the biggest fears within the eurozone about Ireland's financial crisis and of other troubled member states such as Greece, has been in the threat of contagion. Despite the praise for being on target, the IMF was also keen to stress Ireland had to continue with the austerity programme to "rebuild market confidence". "Continued timely implementation of the programme remains essential to support the ongoing recovery, limit contagion risks and rebuild market confidence," it said. Despite fears last year that Ireland could be forced to extend the bailout or seek a second rescue if it failed to return to the bond market by itself, the Irish finance minister Michael Noonan said he did not expect that to happen.

A remarkably gloomy assessment of the world economy - Ms Lagarde warned that urgent action is required to stave off the threat of global recession and another credit crisis. Sounding a stark warning to stronger European countries such as Britain and Germany, the new IMF chief said: "We could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis." To reduce these risks, she called for "substantial" and mandatory recapitalisation to bolster European banks' balance sheets, which will be "key to cutting the chains of contagion". Ms Lagarde, who was speaking at the US Federal Reserve's annual forum at Jackson Hole, said the recapitalisation should first be financed through private channels, but could also be sourced from a Europe-wide bail-out fund. "Developments this summer have indicated we are in a dangerous new phase. The stakes are clear. We risk seeing the fragile recovery derailed. So we must act now," she said. Put simply, macroeconomic policies must support growth. Monetary policy also should remain highly accommodative, as the risk of recession outweighs the risk of inflation." Ms Lagarde's comments risk creating new panic about the funding levels and financial stability of European banks. There have been concerns that lending between banks has started drying up over recent weeks, which was a key sign of the "credit crisis" in 2008.

The Fed chairman admitted that recovery from recession had been slower than hoped and that short-term growth prospects for the US had been adversely affected by Europe's debt crisis, and by the wrangling between Democrats and Republicans over the US budget. He stressed that any repetition of that partisan in-fighting could make global investors less willing to hold US assets or to put money into job-creating enterprises. "Bouts of sharp volatility and risk aversion in markets have recently re-emerged in reaction to concerns about European sovereign debts and developments related to the US fiscal situation, including the recent downgrade of the US long-term credit rating by one of the major ratings agencies and the controversy concerning the raising of the US federal debt ceiling," said Bernanke. "It is difficult to judge by how much these developments have affected economic activity thus far, but there seems little doubt that they have hurt household and business confidence and that they pose ongoing risks." While the Fed was alert to the risks, he said there was also a strong case, despite the poor state of America's public finance, for the new jobs package being planned by the Obama administration to tackle long-term unemployment. "Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery. Fortunately, the two goals of achieving fiscal sustainability – which is the result of responsible policies set in place for the longer term – and avoiding the creation of fiscal headwinds for the current recovery are not incompatible. Acting now to put in place a credible plan for reducing future deficits over the longer term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives." Rejecting the idea that slow growth could morph into a long-lasting downturn, Bernanke said there had been some encouraging signs, including a 15% rise in US manufacturing output and a narrowing of the trade deficit.

As Italy's borrowing costs soared and its stock markets plummeted, last week the ECB's president, Jean-Claude Trichet, and his designated successor, the Italian central bank governor Mario Draghi, wrote to Berlusconi listing the demands he would have to meet if the bank were to intervene and buy Italy's embattled bonds. According to one report, the ECB's demands were set out in humiliating detail. Last Friday, Berlusconi promised a broad range of structural reforms and announced he was bringing forward to 2013 the target date for the elimination of Italy's budget deficit. A new package of measures is due to be endorsed at a cabinet meeting that could be held as early as Friday. Berlusconi's right-wing government has said the package will be enacted by decree, but it would then need to be approved in parliament. Bossi, the leader of the Northern League, called the ECB's letter "an attempt to overthrow the government". In a reference to Draghi that suggested the central banker harboured political ambitions, Bossi said: "I fear that this letter was done in Rome. He's gone from here into Europe, but he's always in Rome." Draghi has been touted as the possible leader of a non-party, or cross-party, cabinet to lead the country were Berlusconi to fall. Bossi also made it clear he was not happy with suggestions that the ECB wanted pension cuts. Berlusconi has refused repeated calls from the opposition and the trade unions for the letter to be made public. But his finance minister, Giulio Tremonti, supplied more detail on the government's plans to a parliamentary committee.

Renewed worries about the Eurozone's finances and the state of its banks - particularly the French ones - have sent shares sharply lower again, all but wiping out Tuesday's Bernanke bounce on Wall Street. The US market, which invoked a rule to help prevent turbulence at the open, is down more than 242 points, having started down 75 points and fallen by more than 300 points at its worst so far. Last night the US market mounted a more than 400 rise after US Federal Reserve chairman Ben Bernanke vowed to keep interest rates low until 2013, but it seems investors are now nervous about what that means for the state of the US economy, and how bad it could get. But attention also moved back to Europe, with news that President Sarkozy was locked in emergency talks with his ministers seeking ways to cut the country's deficit. That prompted rumours that the country was likely to be next to lose its Triple A rating, and also talk that one of its banks could be in trouble in the current financial turmoil, leading to hefty double digit share price falls at the likes of Societe Generale and BNP Paribas. In a note on the rating this week Citigroup said: We expect that France, with its high public debt and deficit, and popular resistance to cutbacks in its even by euro area standards extremely large welfare state is now likely to be the G7 country at the highest risk of losing its AAA rating. The markets appear to share this sentiment with French 10-year spreads over German Bunds reaching 16-years highs on Friday.

BERLIN—Barely 12 hours after a reluctant European Central Bank breathed new life into the euro project, German politics dashed hopes that Europe would soon receive a bigger bulwark against a spreading government-debt crisis. A spokesman for German Chancellor Angela Merkel, Christoph Steegmans, removed hopes of a more robust European Financial Stability Facility, saying the fund will stay as agreed at a July 21 European Union summit. "The EFSF will remain what it is, and keep the volume it had before July 21," Mr. Steegmans said at a regular government press conference. The ECB Sunday made a landmark decision to expand its bond-buying program to include Italian and Spanish government debt, a step aimed at stopping a market sell-off that threatened to send their borrowing costs to unsustainable peaks. The ECB hesitated last week to take such a step, which greatly expands its role as an underwriter of government finances. But it was deemed critical to buy time until an improved bailout fund, the EFSF, could be ratified and implemented before October. The changes to the EFSF mandate would allow the fund to buy government bonds in the secondary market. The European Commission has asked for a massive increase in the EFSF's current lending capacity of €440 billion ($628.23 billion) guaranteed by euro-zone governments. Market watchers said a new volume of up to €1.5 trillion or more might be needed to reassure investors that the fund can offset government solvency threats. The euro promptly lost much of the ground gained from the overnight ECB announcement as investors responded to German opposition to a massive build-up in the euro-zone's defenses against debt contagion.